House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Employment and Workplace Relations and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 7 - Eligible rollover funds

Outline of chapter

7.1 This chapter explains the new regime by which RSE licensees must be authorised to operate a specified superannuation fund as an eligible rollover fund (ERF).

7.2 This chapter also outlines the enhanced director obligations and enhanced trustee obligations for RSE licensees that operate an ERF and transitional arrangements for existing ERFs that are not authorised before the commencement of the new regime.

Context of amendments

7.3 ERFs are maintained for the single purpose of being a temporary repository for the interests of members who have lost connection with their superannuation accounts. ERFs are intended to hold these superannuation interests and generally preserve their value until they can be reconnected with the member.

7.4 ERFs are currently required to accept rollovers and transfers of superannuation from all other regulated superannuation funds and in circumstances specified in the SIS Regulations.

7.5 The amounts transferred to ERFs are typically small inactive amounts or other amounts for members that cannot continue to be a member of their original fund (for example, non-member spouse, in circumstances connected with the division of superannuation).

7.6 Members of ERFs have lost connection with their superannuation and rely on the trustee to protect their interests and preserve their retirement benefit.

7.7 However, the Review found that ERFs, in general, were not effectively fulfilling their function as they have failed to reconnect amounts with members and member protection rules have not been adequately protecting members' interests. Lost accounts can materially impact on the adequacy of many individuals' retirement incomes, particularly where accounts remain unclaimed at retirement, are eroded by unnecessary fees or charges, or receive poorer investment returns than other retirement savings.

Summary of new law

7.8 Schedule 7 of this Bill amends the SIS Act to require trustees to obtain authorisation from APRA to operate an ERF.

7.9 APRA will be able to accept applications for authorisation to operate a regulated superannuation fund as an ERF from any RSE licensee of a prescribed class. It is expected that the regulations will prescribe that only RSE licensees with a public offer class of license or an extended public offer class of license will be able to apply for authorisation for an ERF.

7.10 On 1 January 2014, if an application for authorisation has not been made or if APRA has refused authorisation, all balances in an existing ERF are required to be transferred into an authorised ERF or a fund that offers a MySuper product within 90 days.

7.11 To be authorised to operate an ERF, an RSE licensee must elect the following:

•

to transfer amounts held in the ERF as required by prudential standards if authorisation is cancelled; and

•

not charge members of the ERF a fee that relates to the costs of paying conflicted remuneration or paying an amount to another person that the RSE licensee knows, or reasonably ought to know, relates to the payment of conflicted remuneration.

7.12 New enhanced trustee obligations will apply to a trustee of an RSE that has been authorised by APRA to offer an ERF as members fully rely on the trustee to make judgments about managing their superannuation. These enhanced trustee obligations require trustees to comply with a duty to promote the financial interests of members of the fund.

Comparison of key features of new law and current law

Detailed explanation of new law

Definition of eligible rollover fund

7.13 An eligible rollover fund is defined as a regulated superannuation fund where the RSE licensee has been authorised by APRA to operate a specified the superannuation fund as an eligible rollover fund. [Schedule 7, item 1, subsection 10(1)] .

Application process

7.14 To ensure that APRA is provided with sufficient relevant information to be able to adequately assess applications from RSE licensees, information must be provided in the approved form. This includes the RSE licensee's and the fund's ABNs and other information required by the approved form. [Schedule 7, item 15, subsections 242A(1) and 242A(2)] .

7.15 If an existing ERF intends to continue operating as an ERF, the RSE licensee should lodge their applications by 1 July 2013, or as soon as possible after that date, in order to avoid the possibility that APRA has not decided their application before 1 January 2014. A late application means the trustee runs the risk that the application is not decided and the trustee would be obliged to transfer amounts to an authorised ERF or MySuper product.

7.16 If any information contained in the application ceases to be correct after the application was submitted to APRA and before APRA has made a decision, the RSE licensee will be required to provide APRA with the correct information as soon as practicable. An application is taken not to comply with this section if this requirement is contravened. [Schedule 7, item 15, subsections 242A(3) and 242A(4)] .

7.17 An application for authority lapses if it was made by an RSE licensee and the RSE licensee ceases to be an RSE licensee before APRA makes a decision on the application or, if APRA's decision is subject to review, before the review is finally determined or otherwise disposed of. [Schedule 7, item 15, subsection 242A(5)] .

7.18 An RSE licensee that makes an application for authority must accompany the application with two completed elections. These elections are the same as the two corresponding elections that an RSE licensee would have to make if they were to apply for authorisation to offer a MySuper product.

7.19 First, the RSE licensee must elect to take the action required by prudential standards in relation to amounts held in the ERF if an RSE licensee's authority to operate the fund as an ERF is cancelled. The prudential standards will set out a process for transferring assets to another fund in these circumstances. The RSE licensee will not be subject to any liability to a member for giving effect to this election.

7.20 Second, the RSE licensee must elect that they will not charge any member of the ERF a fee that relates directly or indirectly to costs of the fund in paying conflicted remuneration to a financial services licensee or a representative of a financial services licensee.

7.21 In addition, the election by the RSE licensee also extends to not charging any member of the ERF a fee that relates to costs of the fund in paying an amount to another person that the RSE licensee knows, or reasonably ought to know, relates to conflicted remuneration paid by that other person to a financial services licensee, or a representative of a financial services licensee.

7.22 APRA may request an RSE licensee to provide additional information before making a decision on the application. [Schedule 7, item 15, section 242D ].

Time period for deciding applications

7.23 APRA must decide an application by an RSE licensee for authority to operate a regulated superannuation fund as an ERF within 60 days of the application being received, subject to certain provisions allowing this period to be extended. This is the same period that is allowed for a decision on an application for authorisation to offer a MySuper product. The 60 day period starts on 1 July 2013 or the date of APRA's receipt of the application, whichever is the later. [Schedule 7, item 15, paragraph 242E(1)(a), subsection 242E(2) and section 393 ].

7.24 Should APRA request an RSE licensee to provide additional information in relation to its application, APRA will have an additional 60 days from when it receives this information in which to decide the application. The period of 60 days restarts if further information is requested. [Schedule 7, item 15, paragraph 242E(1)(b)] .

7.25 Additionally, APRA may extend the period for making a decision on an application to operate an ERF by an RSE licensee by a further 60 days, providing it notifies the RSE licensee in writing and within the period they would otherwise have to decide the application. [Schedule 7, item 15, subsection 242E(2)] .

7.26 Should APRA not have made a decision within the time period required, the application is deemed to be refused by APRA and the RSE licensee is not authorised to operate an ERF. This is the same process that occurs should APRA not have decided on an application for an RSE licence or MySuper authorisation within the required time. [Schedule 7, item 15, subsection 242E(4)] .

Authorisation process

7.27 APRA must authorise an RSE licensee to operate an ERF if:

•

the application is in the approved form, contains the information required, states the RSE licensee's and fund's ABNs and is accompanied by elections relating to the transfer of amounts if authority to operate the fund as an ERF is cancelled and to not charge members of the ERF a fee that relates to conflicted remuneration;

•

the RSE licensee provides all of the information required by APRA to approve the authority;

•

the RSE licensee is of the prescribed class;

•

the fund is a registered fund under Part 2B of the Act;

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it is satisfied the governing rules require that the fund meets the purposes of an ERF and that a single diversified investment strategy is to be adopted in relation to all the assets of the fund;

•

it is satisfied that the RSE licensee or each individual trustee is likely to comply with the enhanced trustee obligations for ERFs;

•

it is satisfied that the directors of the RSE licensee are likely to comply with the enhanced director obligations for ERFs;

•

it is satisfied that the RSE licensee is likely to comply with the general fee rules; and

•

it is satisfied that the RSE licensee is not likely to represent a product as an ERF when they are not authorised to do so.

[Schedule 7, item 15, section 242F ].

7.28 APRA must refuse an RSE licensee's application for authorisation to operate an ERF if it is not satisfied of any of these elements. APRA's decision to refuse an application is a reviewable decision. [Schedule 7, item 15, subsection 242F(2) and item 4, paragraph 10(1)(ua)] .

7.29 If APRA authorises an RSE licensee to operate a regulated superannuation fund as an ERF, APRA must notify the RSE licensee in writing of the authority. For a notice given before 1 January 2014, the authority takes effect on 1 January 2014. [Schedule 7, item 15, sections 242G and 392 ].

7.30 If APRA refuses an application by an RSE licensee for authority to operate a regulated superannuation fund as an ERF, APRA must take all reasonable steps to ensure that the RSE licensee is given a notice informing it of APRA's refusal of the application and setting out the reasons for the refusal. [Schedule 7, item 15, section 242H ].

Cancellation of authorisation

7.31 APRA may cancel the authorisation to operate an ERF where:

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it ceases to be satisfied that the governing rules of the fund meet the purpose of an ERF or that a single diversified investment strategy is to be adopted in relation to all the assets of the fund;

•

it ceases to be satisfied that the RSE licensee is likely to comply with the enhanced trustee obligations for ERFs;

•

it ceases to be satisfied that the directors of the RSE licensee are likely to comply with the enhanced trustee obligations for ERFs;

•

it ceases to be satisfied that the RSE licensee is likely to comply with the general fee rules;

•

it ceases to be satisfied that the RSE licensee is not likely to represent a product as an ERF when they are not authorised to do so;

•

the RSE licensee ceases to be of the prescribed class;

•

the fund ceases to be registered under Part 2B of the Act;

•

the RSE licensee contravenes a governing rule of the ERF; or

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it is satisfied that the RSE licensee has failed to give effect to an election not to charge a fee to members of the ERF that relates to conflicted remuneration.

[Schedule 7, item 15, subsections 242J(1) and (2)] .

7.32 If APRA decides to cancel an authority to operate a regulated superannuation fund as an ERF, it is required to take all reasonable steps to notify the RSE licensee in writing of the reasons for their decision. [Schedule 7, item 15, subsection 242J(3)] .

Trustee obligations relating to eligible rollover funds

Enhanced trustee obligations

7.33 Each trustee of an ERF must promote the financial interests of the beneficiaries of the fund. These duties should be equal to requirements for a MySuper product as trustees have full responsibility for managing the members' balances. [Schedule 7, item 15, section 242K ].

7.34 The enhanced trustee obligations for RSE licensees of ERFs are the obligations imposed by the covenants in section 52, as enhanced by the additional obligation to promote the financial interests of members of the ERF. The obligations also include any covenants prescribed under section 54A that are specified in the regulations as forming part of the enhanced trustee obligations for ERFs. [Schedule 7, item 3, paragraph 10(1)(b)] .

Enhanced director obligations

7.35 Each director of a corporate trustee of an ERF is required to exercise a reasonable degree of care and diligence that a superannuation entity director would exercise in the corporate trustee's circumstance for the purpose of ensuring that the corporate trustee complies with its duty to promote the financial interests of beneficiaries of the fund. [Schedule 7, item 15, section 242L ].

7.36 The enhanced director obligations in relation to ERFs comprise this obligation and any covenants prescribed under section 54A that are specified in the regulations as forming part of the enhanced director obligations for ERFs. [Schedule 7, item 2, paragraph 10(1)(b)] .

Contravention of trustee obligations relating to eligible rollover funds

7.37 There is a civil penalty provision for contravention of the additional obligations of a trustee or director of a corporate trustee in relation to an ERF where a trustee or a director of a corporate trustee has breached their obligations. Accordingly, the consequences set out in Part 21 of the Act will apply. [Schedule 7, item 15, subsection 242M(2)] .

7.38 This is appropriate as (in addition to the potential for the court to order a civil penalty or, if certain fault requirements are satisfied, a criminal penalty), it gives the court power to order a person to pay compensation in relation to a contravention of the provision. A civil penalty provision can be escalated to a criminal offence if it is breached and there has been dishonesty or an intention to deceive or defraud.

Governing rules

7.39 The governing rules of an ERF are void to the extent that they are inconsistent with the additional obligations of a trustee or director of a corporate trustee in relation to an ERF. [Schedule 7, item 15, section 242N ].

Misrepresentation of eligible rollover funds

7.40 All persons will be prohibited from being able to offer an ERF unless they are authorised to do so by APRA. It is an offence of strict liability if a person represents that they offer an ERF when they are not authorised. A penalty of 60 penalty units will apply. This penalty is consistent with similar offences for MySuper products and RSE licensees. [Schedule 7, item 15, section 242P ].

7.41 A strict liability offence is appropriate as APRA will provide a written notice upon the authorisation or refusal of authorisation and hence RSE licensees will always know whether they are authorised to operate a specified superannuation fund as an ERF.

7.42 Furthermore, ERFs play a specialised role in the superannuation system as a temporary repository for the interests of members who have lost connection with their superannuation accounts. These members are most vulnerable and require their interests to be protected.

7.43 Misrepresentation that a fund is an ERF could inadvertently reduce the level of protection for members in relation to the enhanced trustee and director obligations when they otherwise would be in an authorised ERF or a MySuper product.

Transitional provisions relating to eligible rollover funds

7.44 The RSE licensee of an existing ERF that has not been authorised to operate as an ERF must take the action required under the prudential standards in relation to the amount before the end of a period of 90 days beginning 1 January 2014. [Schedule 7, item 17, subsection 394(1)] .

7.45 From 1 January 2014, existing ERFs can no longer accept amounts unless they are authorised. This commencement date is consistent with the start of the inter-fund consolidation regime. Balances of existing ERFs that do not become authorised will need to be transferred to an authorised ERF or to a MySuper product. [Schedule 7, item 17, paragraph 394(2)(a)] .

7.46 This provision ensures the amount is moved under inter-fund consolidation or to an authorised ERF or MySuper product. This will mean members will either be reconnected with their balances or remain with the heightened protections of ERFs or MySuper products.

7.47 An existing ERF is taken to be an ERF for the purposes of Division 3 of Part 24 during the period beginning on the day the amendments commence and ending on 31 December 2013. [Schedule 7, item 17, section 393 ].

7.48 APRA will be able to make prudential standards on the movement of amounts held in existing ERFs that may include provisions requiring an RSE licensee of an existing ERF that is not authorised to operate as an ERF to transfer the amount to a regulated superannuation fund that is an ERF or offers a MySuper product; setting out the requirements that must be met in relation to the transfer of such an amount; and dealing with other matters relating to such an amount. [Schedule 7, item 17, subsection 394(2)] .

7.49 The RSE licensee is not subject to any liability to any member of the fund for an action taken in accordance with moving amounts held in existing ERFs. [Schedule 7, item 17, subsection 394(3)] .

7.50 A read-down provision will only require transfers to take place if it does not represent an acquisition of property on other than just terms under paragraph 51(xxxi) of the Constitution. However, it is unlikely that an acquisition of property will occur when balances from existing ERFs are transferred into a newly authorised ERF or a MySuper product. [Schedule 7, item 17, subsection 394(4)] .